It's time for SMEs to act on the environment

Six of the 10 most polluted locations in the world are in the rapidly growing emerging market economies of China, India and Russia
Dipinder S Randhawa, Business Times 28 Nov 07;

Of the 75 million enterprises in the world, an overwhelming number, about 90 per cent, are small- and medium-sized enterprises. They make a large contribution to output, employment, and adding value and are harbingers of innovation and dynamism in the economy. However, SMEs also contribute substantially to environmental problems.


THE award of the Nobel Peace Prize to former vice-president Al Gore and the Intergovernmental Panel of Climate Change will undoubtedly bring to the forefront the debate on carbon emissions, general environmental degradation and climate change.

Last month, the Asian Corporate Governance Association-CLSA released its report on Corporate Governance Watch 2007 and for the first time highlighted the need for adherence to environmental safeguards by corporations.

At the World Economic Forum summit meetings at Davos, the threat of climate change and environmental protection loomed large at the meetings of CEOs - surely a sign if any more are needed that the problem merits serious consideration.

A report released by the Environment and Sustainable Development Division of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) further highlighted the grave risks to sustainable growth in South-east Asia if the environment continued to be neglected.

Of the 75 million enterprises in the world, an overwhelming number, about 90 per cent, are small- and medium-sized enterprises. They make a large contribution to output, employment, and adding value and are harbingers of innovation and dynamism in the economy. However, SMEs also contribute substantially to environmental problems.

A great deal of public scrutiny, activism by green groups and other NGOs concentrates on large corporations, as indeed it should. However research has shown that even in the developed OECD economies, SMEs fall below the regulatory radar and contribute significantly to water pollution, solid waste, often producing toxic waste.

A recent study showed that SMEs were responsible for more than 60 per cent of waste generated in the UK.

Six of the 10 most polluted locations in the world are in the rapidly growing emerging market economies of China, India and Russia, and another two in the former Soviet republics.

As the push for faster growth gains momentum and comparative advantage shifts rapidly across national boundaries, the pressures to relocate production and cut corners in the search for profits and economic efficiency are only likely to intensify.

In South-east Asia, while pollution problems are isolated now, the toxicity of the Meyacauayan River near Manila from lead and other metal waste dumped by a cluster of SMEs, the pollution in Jakarta, Manila and Bangkok are pointers towards the future.

The effects of the forest fires in Indonesia are well documented. At risk is the Mekong with increased damming upstream and growth of industry downstream. Deforestation of the hill sides and in the Mekong Basin is contributing to floods downstream. Cross border deforestation, the exploitation and degradation of coastal and marine resources is reshaping the landscape in ways that may not be immediately obvious, but become visible only when it reaches serious proportions and catches the public eye.

A casual conversation with anyone indulging in scuba diving since the 1990s will testify to this. Coastal degradation compounded the devastating effects of the 2004 tsunami.

There are concerns about the poorer countries in the region being used as dumping grounds for toxic waste produced in developed economies. The tendency to relocate 'dirty' polluting industries to low cost locations is likely to exacerbate the problem in the future.

With globalisation and continuous easing of the movement of capital across national boundaries, cross-border investment is growing rapidly. SMEs are an integral part of this process in South-east Asia. If the region is not to repeat the experiences of China and India in their quest for growth without regard for the impact on the environment the time to act is now.

While it may not be a concern in Singapore, the problem is serious in the region as a whole. Pollution and environmental degradation do not respect national boundaries. Studies on ecological footprinting at the UN show that the Asia-Pacific region is already living beyond its 'environmental means'.

There are clear signs that the damage to the environment cannot be sustained. It is a serious problem in the rest of South- east Asia, to be ignored at our own peril.

SMEs are a highly diverse group, ranging from family run neighbourhood stores to firms engaged in cutting edge research in bio-technology with a global market. Their small size and large numbers makes monitoring challenging, cumbersome and expensive.

As matters stand neither SMEs nor most of the regional economies possess the knowledge and wherewithal to implement or conform to or to monitor environmental safeguards. SMEs have neither the financial resources nor the expertise, and as often as not, awareness of environmental regulation.

SMEs lack the knowledge base required for compliance and reporting. It is essential for governments and industry associations to step in via education programmes, guidelines and direct help in bridging the knowledge gap. Even in the UK, fewer than 3 per cent of all businesses have an in-house accredited Environmental Management System (EMS). This is largely due to ignorance of the existing regulations.

As Asean seeks to integrate, policymakers' attention needs to shift to sustainable growth. Asean has an array of policy statements and legal instruments to tackle cross border pollution problems, however rendering these instruments effective is a challenge.

Policymakers in most of the regional economies, especially those outside the Asean 4 are yet to develop the capacity to assess and monitor adherence to environmental safeguards. The cross border nature of the problem demands a pan-national, regional, solution.

Environmental safeguards need to be monitored by a regional agency with a clear and effective mandate. Asean needs to develop a regional framework that will include cross border regulation and monitoring. Regulation and monitoring is by no means enough. The challenges are manifold. SMEs require explicit assistance, financial as well as technical to help them deal with the regulation.

Herein lies a substantial role for industry associations, environmental groups, government agencies as well as NGOs with technical expertise.

There are silver linings - Bangkok has effectively managed to reduce air pollution - policymakers and NGOs are becoming proactive as global warming and climate change become politically charged issues.

There is a greater awareness of environmental issues amongst the younger generation. A large constituency is building up to enforce adherence to environmental safeguards, customers vote with their feet, a number of stakeholders can exert direct pressure on firm's management. However serious problems do persist.

As the UNESCAP's Division of Environmental Sustainability and Development has pointed out, South-east Asia is experiencing immense pressure brought about by rapidly changing production and growing consumption fuelled by high rates of economic growth.

The challenge is maintaining these high growth rates without compromising on the one resource that is vital to our future - the environment.

The rationale for conforming to environmental safeguards will become compelling when SMEs begin to view environmental safeguards not as a financial and regulatory burden, but an opportunity for redesigning their business model to make the enterprise sustainable and profitable in the long run.

Dipinder S Randhawa is a Fellow with the Saw Centre for Financial Studies at the National University of Singapore Business School. This piece is an offshoot of ongoing research at the Saw Centre on the SME sector